Setting up a family trust is usually driven by a new business opportunity, a growing business, or a need to properly structure your investments. And when set up correctly, there are clear family trust tax benefits.
But before you make that decision, it’s important to understand the purpose of a family trust, how it can benefit you, and also make sure that it’s a good fit for you and your business.
The Liston Newton Advisory team are experts at providing support for those looking into setting up a family trust.
When and why to set up a family trust
You should seriously consider setting up a family trust if you run your own business and profits are growing, or if the business is taking on more employees. If your average tax rate is approaching 30 per cent, a family trust can help reduce your tax rate.
If you're making significant investments, a family trust can also act as a holding structure. It can protect those assets from financial and legal troubles — and can also save you tax along the way.
However, entering into a family trust isn’t a simple decision. It requires careful thinking and planning for the future of your business and/or investments.
Benefits of a family trust
Make your business tax-effective
Income and capital gains can be distributed across a family group in proportions which best suit each individual's tax rates. This means setting up a family trust allows a trustee to distribute profit from a business in a tax-effective manner.
Where the profit of a business gets too large to distribute effectively, a family trust can also distribute to a separate company to cap the tax rate at 30 per cent.
Tax-effective investments
A family trust is a tax-effective structure to hold investments, as the dividend income received can be distributed across the family in a way that best minimises tax. If an investment is sold, the trust is able to receive a capital gains concession, and the capital gain income can be distributed among family members.
Asset protection for your business
If you run a business from a family trust, you can set up a company to act as the trustee. This means you can access the limited liability benefits of a company structure, and gain the tax flexibility benefits of a family trust.
Asset protection for investments
A family trust can protect the assets of a family group, as assets aren’t held in your personal name. A family trust is a separate legal entity, meaning you can access a certain level of protection in the event you find yourself in financial difficulty or face legal action.
Disadvantages of a family trust
Family-only
One of the main drawbacks to a family trust is that you can’t add additional shareholders, and you can’t add people outside your family.
Doesn’t scale well
If your business truly takes off and profits begin to exceed $500,000 per annum, the tax planning of a family trust becomes increasingly difficult. In this case, a company becomes a better solution.
No access to government grants
While extremely flexible in accessing funds, it’s quite limited in other ways. Operating a family trust means you can’t access many government grants and tax concessions, such as the Research and Development tax concession, or Early Stage Investor Concessions.
On-going maintenance
A family trust requires on-going accounting and tax advice throughout its life. These costs start at $1,500, plus GST, for very simple holding trusts. The amount increases as the trust becomes more complex.
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How a family trust works
Much like a company structure, a family trust prepares a set of annual financials and lodges a regular trust tax return.
- Profit is calculated at the end of the financial year (income, minus expenses plus the previous year’s losses), and then distributed to the beneficiaries.
- Distributions received from a trust form part of the beneficiary's assessable income. If the beneficiary receives income from other sources, too, all their income is taxed together.
The trust doesn’t pay tax, so beneficiaries are taxed on the amount of income placed in their name. If the business being run via the trust generates more than $75,000 of income in a financial year, then the trust is required to register for GST.
Set up costs
In Australia, the cost of establishing a family trust is relatively low. A trust generally costs $1,500 (plus GST) in legal documentation to set up, or $2,500 (plus GST) for a trust with a corporate trustee.
The final word on family trusts
While the family trust tax and asset protection benefits are obvious, it’s a structure that needs to be understood properly before you enter into one. If you think a family trust is right for your situation there are many pertinent questions that need to be taken into consideration.
Ask yourself:
- Am I expecting more people to join my business?
- Am I expecting anyone to exit the business?
- Do I intend to sell my business for a large capital gain, or do I want to issue shares to existing employees?
- Do I or my family plan to take advantage of government grants or tax concessions?
- Am I prepared to keep strict financial records?
If you’re looking for a structure that provides for tax-effective planning, and an improved level of protection for your family and business assets, then a family trust might be for you.
